Thursday, February 11, 2021

A version of this article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Everything bad is now good, market edition.

The stock market is the meme market now.

From the GameStop (GME) saga to Tesla’s Bitcoin buy (BTC-USD) to Elon’s Dogecoin (DOGE-USD) purchase, it seems like any internet-based humor that is even vaguely financial manages to impact asset prices.

But factoring in how much of a meme a given asset might be is just not part of traditional portfolio management or anything they teach in the CFA program. Yet.

What investment managers do learn, however, is that sometimes in markets everything that seems like it shouldn’t happen does. In other words, there are market moments during which it makes sense to think about what trades might make the least sense. And there you find your winners.

“Imagine for a moment that a portfolio manager describes their investment process as follows: they focus exclusively on companies with deteriorating or questionable business prospects, and lots of debt,” writes Credit Suisse analyst Patrick Palfry in a note to clients published Tuesday.

“They go on to highlight their fondness for companies that make poor use of invested capital, and experience large selloffs during periods of stress. While such a process might sound absurd, it is an excellent depiction of what’s been working since Pfizer’s November 6 vaccine announcement, which shifted investor focus toward the reopening process.”

In their note, Palfry and the team at Credit Suisse run through a series of these measures that define this market wherein investors reward what they call “junk and disappointment.”

Notably, Credit Suisse finds that stocks with high short interest have almost doubled the performance of stocks with low short interest. On the heels of the GameStop episode which saw, for a time, a number of other heavily shorted names become market darlings this performance is perhaps not all that surprising.

What is surprising, however, is that this trend was in place before the GameStop meme became a national news story. As Credit Suisse notes, “this pattern mimics other low quality metrics, and is reasonably unaffected by recent headlines on retail investor activity.”

Other measures that surface big winners include screening for stocks that have experienced the highest volatility, shares of companies that produce a low return on assets, and stocks with the biggest 52-week drawdown.

And as if this series of negative indicators turning into alpha generators isn’t frustrating enough for investors inclined to focus on fundamentals, it gets worse. Because actual fundamentals haven’t been helpful at all.